Well, normally when economy performs well & interest rates hiked (3-times in 2017) it is supportive for the currency. Though pace of US economy accelerated in the last quarter of 2017, but threat/risk of government shutdown was weighing heavily on the Greenback that was spoiling the party.

After Trump slapping tariff on washing machines and solar panel, US Treasury Secretary’s statement that “a weak US Dollar is good for USA” added fuel to the fire.

Further, US bond yields has picked up in recent months. This followed after China major holder of US Treasuries reduced its bond portfolio. Earlier there was also some signs coming from China about its willingness in support of the move that was later denied that added pressure.

Overall, investors are required to keep a close watch on European growth too, which is performing at a much faster pace and continuation of trend will compel tighter condition in Euro-zone too.

Therefore, unless US economy performs extraordinarily or gain of European economy eases US Dollar is likely to remain under pressure for some more time before bouncing back.

There is no benchmark as such that what size of debt can lead a country to bankruptcy or collapse because of the bias global authorities, Central Banks/Regulators/ Rating Agencies approach.

This was witnessed after 2008-9 European meltdown as, Greece that had deliberately misreported and cheated the global financial market/authorities by providing incorrect data was instead given extraordinary support by the European Commission. The commission simply showed its helplessness by stating that it lacked audit powers relying on goodwill and integrity for data provided to them.

Greece was given 3 bailouts of EURO 246 billion. In 2009 the size of its debt was 109 pct that has surpassed 185 pct. In this case rules were surely bent. It was obviously done for political reasoning. The authorities/regulators did what was “Easy” and not what was “Right”.

I would add that such measures are self created Financial Problem that ultimately leads towards isolation. Instead of blaming other, Regulators/Central Banks/ Financial Authorities/Rating Agencies/ are responsible for causing mess.

Here are the list of factors that caused/causes Financial System to crack…….

#Violations

#Breaches

#Flawed Audit Report

#Weak Risk Management

#False Rating

#Change of Accounting Rules to accommodate the violator for Wrong Doings #Artificial Compensation.

#Longer Maturities of 25 years with 10 years grace period was intentionally offered to Greece to buy time, which is curse for the future generation.

The global financial suffering is because instead of Lending Money to Corporate Sector for Stimulation of Economy, cheap QE money was/is given for Bank Capitalization by making excuse that funding is provided to protect the industry from collapse.

Japan has the highest public debt of well above 240 pct. Italy, Portugal, Singapore, USA and Belgium is above 100 pct.

USD FATE as Reserve Currency:

USD which was a whisker above 70 pct in 1998 as a reserve currency was gradually losing its gloss and dipped down to below 62 pct in 2009 due to poor economic condition has once again regained some of its strength on back of European turmoil and due to US economic recovery is currently hovering above 64 pct.

In view of global economic development with Europe and Japan struggling. UK is in a Brexit fix and I believe China still needs over a decade or two to catch the advance economies to attain top slot, I do not see US Dollar succumbing to any other external pressure. Rather combination of Monetary Policy by the FED and Fiscal Stimulus will play major role to contribute US growth.

I am quite baffled with the timing of 5 pct depreciation of Rupee against US Dollar (in 3-days). In my view the move to weaken Rupee is purposeless in economic sense. There is nothing to cheer about, as depreciation of Rupee will slash standard of living and bring more misery unless fundaments are completely changed.
The strategy of weakening of Rupee is a futile exercise as there is no evidence of economic gains in the industrial and manufacturing sector. This is why growth in Revenue collection has always been difficult to attain and Tax to GDP ratio is appallingly low. Neither weak Rupee has ever helped in halting imports, as often claimed.
It is because our economy is totally dependent on same old erratic strategy that had been governed by homogeneous polices since last many decades. Excessive austerity of fiscal policy in this decade proved to be meaningless that may have pleased the lenders/donors only.
However, ongoing decade old policy is the major cause that has dented the economy badly as it had ultimately choked real prospects of economic growth due to liquidity constrains (Domestic and External). Unfortunately the move had neither helped to contain deficit that had eventually squeezed tax collection due to fall in output.
The underline cause of economic difficulty is surely caused by years of irresponsible approach towards economy. Instead of playing a role to stabilize the economy, the policy shift to focus on deficit for the sake of conditional IMF borrowings has backfired.
In the face of slack economic condition that can be determined by continuous fall in Deposit/Advance ratio since a decade, loose monetary stance could have played major role in boosting the economy, with a medium to long term plan for reducing the government deficit. Instead of allowing it to become endemic, priority should have been to create new employment opportunities.
If we carefully assess the global economic condition and closely monitor the global economic data, since over a decade though the key focus was/is to reduce the high government deficit that demands higher interest rates, in reality despite exceptionally high deficit and higher inflation rate, proportionally interest rates are unprecedentedly and intentionally kept low to halt rising debt and to boost the economy.
The lesson that we should learn is that austerity not only discourages investments, it compels slash in budget, choke growth and hampers business confidence.

CONCLUSION

The truth is that there is no single exchange rate regime, which is considered best or most successful exchange rate mechanism. It is for the country to adopt the exchange rate regime that suits best for its requirement.
If we see the timing of Rupee Depreciation, it is certainly a very a brave move, since the government approaches elections. But weakening of Rupee, which could be based on Real Effective Exchange Rate (REER) and or exporters demand is unlikely to bring respite to the economy, as Pakistan’s economy gained nothing in last 10-years after 77 pct depreciation of Rupee vs USD.
There have been quite a few arguments by various so called Pundits that have been arguing until recent that the economy is doing wonders are now proclaiming that Rupee should have been depreciated long before.
I would like to ask them that then why they have never ever demanded appreciation of Rupee if the economy was earlier doing exceedingly well ? Does 77 pct depreciation of Rupee in last 10-years or so means that the two elected government’s economic policy was a total failure and Musharaf’s economic performance was far better? I am open for discussion.
Depreciation of Rupee is only a heavenly situation for Exporters, as export financing rate is at 3.5 pct and with 5 pct depreciation they earn clean spread of 1.5 pct unless more depreciation takes place, which will further add to their gains.
The biggest gainer will be the government as at current rate and with USD 20 Billion Forex Reserves, SBP earns exchange profit of roughly Rs 110 Billion. SBP may end up with record profit that should exceed total profit of the Banking Sector.
In return this will help the government to pocket extra income to meet their Tex Collection shortfall.
Let’s not be fooled by the expert comment from the receiver of best equity broker who joined me today on AAj tv and was commenting that import of car will drop. Is he telling the market that Automobile sector will take the beating? Then what about Cement and Energy sector, which is heavily dependent on import? Is stock market heading for collapse? Nothing can stop imports unless there is a policyshift.
Yes, this could be another election gimmick, as depreciation of Rupee will give space to increase food support price.
In 2018, the global commodity prices is likely to remain from stable to slightly up, but any increase in support price will spoil the party, which looks a good possibility due to coming election if held on time.
Overall due to higher trend in commodity prices, export bill could inch up by a Billion or two. But if oil price averages around USD 55 per barrel, domestic demand for electricity and CPEC related purchases will add pressure. Profit repatriation, Debt and interest related payments will add further pressure on Exchange Rate.
Due to developments in Gulf region, I am looking for mild increase in remittances that may give some respite to the exchequer.
However, I would like to point out that Depreciation of Rupee was one of the major causes of Musharraf loosing the elections, as the impact of weak Rupee lead to higher petroleum cost, higher electricity bill and surge in transportation cost, higher food prices, which means higher inflation. This is the high price that government will have to pay for minor gain at a very crucial time.
Bottom line will tell that the exporters/commodity producers will be the only gainers against Rupee depreciation and the people and economy will be the ultimate looser or sufferer.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Pakistan will gain some breathing space from pressure of financing a large budget deficit after successfully raising USD 2.5 Billion denominated 5-years Sukuk worth USD 1 Billion @ 5.625 pct and 10-years Euro Bond @ 6.875 pct.
Despite all odds due to ongoing domestic unrest, trouble in two of its neighboring borders and rating agency warning/reminding of political risk, the country did manage to attract highest ever bids.
The pricing has surprised forecasters making their predictions wrong. This time Pakistan was able to sell its paper at a much advantageous yield.
Against sale of 5-years Sukuk in Oct 2016 and against 10-years Euro Bond in April 2014, then cost was higher by 4.22 pct and 5.55 pct respectively against US Government Bond.
This time despite hike in US interest rates, cost wise burden on exchequer will ease as 5-years was higher by 3.555 pct and 10 years was higher by 4.545 pct respectively, which is price wise preferable.
What bothers most is that country spends a notch below 30 pct of its revenue on interest payments, around 32 pct of with its debt is in foreign currency and another 32-35 pct of borrowing is required to meet its requirements. It all provides good hint that at this pace fiscal deficit will hit 5 pct by June 2018.
There is lot of talk about CPEC, but I am not expecting big gain in medium term. What is more worrying is that any minor gain in export will be eaten up by the oil bill, as higher domestic demand and higher oil prices in the international market, which is likely to linger on for another 3-6 months before easing of oil prices may inflict damage to the economy.

What Caused Demand for Pakistani Bonds ?

I would pick two major international factors that helped higher participation in Pakistan Bonds.
Due to lower oil prices Investors were hoping for huge bond auction from Gulf oil producing countries to finance their deficit. This is why, last year in April we saw Abu Dhabi taping USD 5 billion to plug its deficit. In May 2016, Qatar faced with similar situation raised USD 9 Billion paying 120 and 150 bps in 5 and 10 years over US Treasuries. Oman too, which is the weakest oil exporter had to pay 190 bps for 5-years, 300 bps for 10-years bond and 387.5 for 30-years for its bond.
Similarly, Saudi Arabia in April 2016 raised USD 19 Billion from its Domestic and International Sukuk Bond market and again in September due to financial constrain caused by 3-years old oil slump, we saw Saudi Arabia entering bond market by paying spread of 110 and 145 bps in 5 and 10-years respectively. It is targeting balanced budget 2020.
The budget pressure is so immense on the Middle Eastern oil producing counties that this year bond was tapped by almost all, Bahrain USD 3 Billion, Iraq one Billion after a decade. Jordan and Kuwait too joined the bandwagon.
Since September 2016, oil prices on an average is up by more than USD 15 and is comfortably averaging well above USD 50 or is nearly 50 pct higher that has given respite to the M/E oil producing countries.
Amongst the good lot of investors, quite a few investors that have been holding liquidity and eying Gulf countries for bond sale must be aware that the sale of bond in the region will likely thin down in near to medium term because of higher oil prices.
We cannot ignore the fact that the development in Saudi Arabia is another big reason after its anti-corruption purge stance. It is more likely that the Saudi’s government’s kitty will fatten that should ease financial stress to a certain extent.
While, investors in the region must cautious and some may even consider temporary shifting of their asset portfolio, which could be blessings in disguise that helped flow on funds in to Pakistani bond market. It’s still a good opportunity for the country that should not be missed due to lack of perspective.
However, we have to realize and open our eyes that the economy cannot borrow forever to finance its deficit. Banks will have to put a halt on its investments in government securities. Pakistan desperately needs to address its obsolete business structure, stop the noise from popular business press and will have to dismantle old business and reinvest in core. It will then help to prepare a wall to determine that what is required to generate profit in a business.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Why are we so worried about widening of Trade Deficit? Then why are newspaper columns always praising about growth in telecom sector, auto sector, cement sector, and booming construction business?

Soon after the launching of AAJ Tv Channel in 2005, I was anchoring a TV talk show and my guest was SBP Governor, it was the first show of its kind. I was worried about the rising Trade Deficit trend and I hurriedly asked him, as imports was surging against our exports. It was because oil prices then broke crucial technical and psychological barriers of USD 60 per barrel.

I was lectured that it’s an encouraging sign as import of heavy machinery mostly pertained to textile sector that was expected to do wonders in future. Unfortunately despite numerous types of incentives provided in past (Heavy Depreciation of Rupee by 75 pct and Sharp cut in Export Financing Rate by 7 pct) our textile industry still carries long list of demand and is glued to outdated technology. During this period its Regional competitor India, Vietnam and Bangladesh roared ahead, as its current global textile export shared increased to 4.9 pct, 4.2 pct and 4.2 pct respectively, whereas Pakistan’s textile share slumped to 1.7 % from 2.2%.

Few months later in another Tv talk show, while interviewing an important government official that was also advising Pervez Musharraf on economy, I showed my concern about hike in wheat support price that had pushed prices of bread (Nan) from Rs 2 to Rs 2.5 per Nan.

I was told that hike in wheat support price will help to arrest wheat smuggling to Afghanistan, as 2 million tons of wheat was smuggled annually. The trend of hike in wheat support price continued till date, but smuggling never halted, instead there is a rise in smuggling, whereas, Nan is presently sold for Rs 9-10.

While, in June 2008, as oil prices continued to climb to a record high levels breaking USD 142 per barrel, motorist in Pakistan were encouraged to focus on wonder fuel that was introduced in the 1990’s, as an alternative to Petrol, Compressed Natural Gas (CNG) hoping to lower oil bill.

I was never comfortable switching to CNG fearing future gas shortage and hence, defended against all odds in my various talk shows. Today, estimated motorist is around 3 Million. No one is keen to invest in this industry, as all indications suggest chronic gas shortage restricting to gas rationing. It is a double whammy as electricity is required to operate CNG gas compressor. And to give you a hint that how it is hurting the economy, LNG import increased from USD $ 570 Million 2015-16 to USD 1.3 Billion 2016-17.

Similar is the case with Telecom and Construction industry, which is totally dependent on foreign products (nearly 70-80 pct), which is now a huge burden to the economy.

Despite easing of oil bill after October 2014 crash to nearly half the size, high oil consumption is a pain due to friendly import policy that eats 50% of our exports.

While, we still boast that we are agriculture country, but we have nothing really to offer/discuss due to outdated equipment and obsolete stance as the economy totally rely on “The Political Economy of Agriculture Price Policy”. Hence, we are only able to export Wheat, Sugar & Rice by allowing heavy cushion or by providing support through off market price.

Regrettably, despite extraordinary type of subsidies given to the agriculture sector, the country is unable to meet the international standard. These are the major factors, which is why we are not competitive and do not attract foreign buyers.

This is why due to policy flaw and outdated products, Rupee depreciation never gave and will never give boost to exports. Neither weak Rupee will halt import, as the economy cannot put brakes on purchase of oil, machinery and equipments.

While decade old history would tell that Shaukat Tareen has been talking of targeting 15-20 pct Tax to GDP and Rs 500 to Rs 1.000 Billion Corruption (annual), but till date nothing has changed and with ongoing attitude nothing will ever change in next 10-years if we continue to with the existing Policy/Politics. Instead, at current pace in 10-years Local Debt will Hit Rs 32-35 Trillion. External Debt will surge to USD 130-150 Billion and annual Deficit financing will be roughly around Rs 3.5 Trillion. Higher Policy Rate will bring more misery to the economy, unless sharply reduced.

Therefore, Policy makers (Monetary & Fiscal) should not be misguided by the Macroeconomic indicators, which is well supported by the window dressing. It is rather preferable to look into the Microeconomic indicators for genuine guidance.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Suddenly voices of protest are heard from all over the country denouncing current government’s economic policies fearing “Fiscal Stress”. The worsening of economic condition is not the result recent happenings.

The fact is that the crack in the economy started to appear more than decade ago caused by Fiscal difficulties. It is because during difficult times our economic managers always went for the easier option i.e. “Structural Adjustment”, which is the IMF recipe, whereas, our economy demands “Structural Reforms”.

Though country is not facing Debt crisis right away, but signs of “Fiscal Stress” often referred as Debt crisis relating to Debt Servicing are clearly visible, as governments over last decade or so to its service debt were totally dependent on Domestic and External borrowings.

Main purpose of excessive Domestic borrowings by respective governments is to finance debt that does not give free hand to spend and to stimulate economy, while major purpose of External borrowings is to service Foreign Debt rather than helping industrial and manufacturing sector to grow, which is country’s dire need. Overall this strategy helps to contain deficit at the cost of real economic growth.

However, this situation has caused severe economic damage/suffering to the economy having overall negative impact. It severely jolts Revenue collection pushing the tax base to lower trajectory. Subsidy are given for compensation purpose, which is unproductive, as it is not result oriented, but is good for political reasons and hence, it is sheer waste of money. Falling exports is because of obsolete method/technology and policy flaw that has no scope of improvement if present stance continues.

SBP’s prolonged Hawkish policy stance over a longer period of time has further worsened Debt and Servicing condition because of higher government borrowing cost. Expensive external borrowing added fuel to the fire.

Some may have reservations about the term “Fiscal Stress”, as inflation is too low, but realistically there are numerous worrying data/factors such as severe liquidity crunch, which cannot be managed without regular Open Market Operation (OMO Rs 1.435 Trillion-Current) injection and SBP Forward/Swap ($3.9 Billion) transactions to generate Rs & USD liquidity. Market is extremely concerned that SBP has not updated on its website its International Reserves/ Foreign Currency Liquidity position that shows data as of May 31, 2017 and fears that number has substantially grown.

Further, it is worrying that despite low inflation rate since last couple of years pressure has not eased. Constant Rescheduling of Loans and Circular Debt, Continuous Government Borrowings at higher rate including Coupon (T/bills, PIB & Sukook), frequent Rollover or fresh external long term borrowings with combination of short term loans and persistent approach towards IMF over last 3-decades with minor breathing moments is enough reasoning to support my argument that the economic condition is alarming.

While, Forex Reserves will remain vulnerable due to growing size of our debt burdened economy that totally relies on foreign borrowings (minus exports & remittances).
Lack of consistent income and in the absence of income source it will continue to add pressure at the time of interest payments of foreign loans, maturity of foreign borrowings and profit remittances.

Causes of Economic Unrest

Political egoism at all levels is the root cause of social-political chaotic unrest and economic distress. Parliament which is supposed to be the real place for elected representatives to legislate reforms is mostly found short of quorum.

Sadly, people’s unresponsive behavior to counter against all odds has caused lot of damage, as they have never seriously raised their voices disapproving respective government’s unacceptable activities that have caused pocket pricking.
In 10-15 years, no government has ever bothered to take any serious measures to strengthen their safety net system to undo the wrong practices.

Egoism and corruption is continues to flourish, it has become the basic norms of our sociopolitical life. Acceptance of bribery has become such a common thing that I will not hesitate to add that it is an “Unconstitutional Cult” as it is no more considered an immoral act.

Watching daily Tv talk shows, viewer can easily sense that politicians are mostly preoccupied in projecting their own affairs to meet their desire by targeting opponents. They are least bothered about the poor class (poverty) of our society, which is majority in size.
Role of Finance Minister

I don’t want to mix-up economy with the ongoing FM’s court cases that has nothing to do with my article. In my opinion FM Isaq Dar is a shrewd Financial Manager and a successful negotiator. The purpose of this article is not to defend Isaq Dar. This write-up is purely in National interest to indentify the mistakes and let the readers know the facts and it is for them to decide.

The real truth is that soon after joining PPP –PML (N) Collation government in May 2008, Isaq Dar clearly sensed Pakistan’s financial hardship and knew that he will not be able to get support from PPP lead government, nor he can act on his own, he quickly decided to quit the job.

Coming back to the recent ongoing debate regarding Dar’s role in economy linking it with Pakistan’s excessive foreign borrowings and alarming “Rise in Debt” that has inflicted severe damage to the economy. I partly agree for not adjusting to some of the fiscal demand/needs.

I will put the blame on current and past governments. Our “National Assets” was sold for peanuts without formulating future strategy. I will hold governments and its representatives of recent past for causing damage to the economy that wasted Billions of US Dollars in promoting consumer culture in the country instead of building infrastructure and industries.

Unfortunately, protesting Parliamentarians of past and present have never raised their voices on the National Assembly floor about financial irregularities or wrong polices by tabling the bill and hence, they are equally responsible for inflicting financial damage to the economy. It is always easier to find a scapegoat and blame others without any sound reasoning to gain political mileage.
Window Dressing and Fudging

Window Dressing (WD), Fudging or for Creative Accounting is a very common practiced all over the world. It is true that economies cannot survive forever on Window Dressing.
ECB, FED, BOJ and UK intentionally opted for Unorthodox Monetary Policy Stance and preferred Conventional Method of Ultra Easy Monetary Policy and doses of fiscal stimulus to avoid further damage and support their respective economies. Is this not Window Dressing?

I would like to remind readers that Bloomberg L.P filed official complaint against FED in November 2008 for USD 2 Trillion worth of secret loans to banks? Accounting changes were officially allowed by UK authorities after 2008-9 crises, which are also fudging.
LIBOR, which is supposed to be the benchmark interest rate used around the world that could have influenced interest rate on estimated USD 800 Trillion in loans and investments, is the most recent dirty fudging case.

Voices around the world were never raised when oil was @ $ 145 per barrel and Gold hitting all time around $1917 per ounce. Is it not amusing that then inflation in Europe was 2.75 pct &in USA 3.25 pct and interestingly ECB interest rate was @ 1 pct and FED rate was 0.5 pct, which is not as per normal practice.

Above example is evident that everyone supported misreporting in their country’s National interest because it is part of the accounting strategy to save/halt the country/economy from for further deterioration or possible emerging crisis.

In this type of situation no one cares about the Depositors interest that they are getting negative return on their deposit, as higher interest rate means sizable rise in National Debt.

Therefore, in my view, the biggest setback to the Pakistani economy over the years is the result of lag monetary policy approach that has encouraged banks to reduce its corporate lending portfolio and shift and investments in Government Paper, which is reduced to 52 pct from the highs of 76 pct of the Loan to Deposit ratio and allowing banks to invest major part of their money in government securities. We should take a leaf accept our mistakes and adopt similar strategy by slashing our policy and coupon rates gradually by 300-400 points. On an average 3 pct cut will ease servicing of domestic debt burden by nearly Rs 250 billion plus. It will arrest the pace of rising debt or else at current pat by 2021-22 country’s debt will easily surpass Rs 35 Trillion

How and Why the Trouble Began

In my view, unnecessary weakening of currency and higher discount/policy rate is the spoiler of our economy as both turned out to be nightmare for the economy and public in general. Weak Rupee never helped exports, but pushed inflation to sky-high levels, made common man’s life miserable, as everything is out of his reach and higher policy rate halted new businesses to grow.

If we did deeper look at our past, soon after the 9/11, Pakistan’s economy started picking up as remittances inflow was pouring in the country fearing backlash. In the KERB market foreign currency was flooding due to Afghan factor and then came a point that US Dollar was cheaper in the Kerb Market Rate than the inter-bank rate, while the economy also started to pick up and was stable for nearly 3-years.

The trouble began in the 2nd half of Musharraf’s era, as Pakistan’s Financial Managers became too complacent without realizing that nothing is permanent. During this period, the size of economy surpassed USD 100 billion marks. Pakistan’s FDI in that period pocketed roughly around USD 50 Billion.

While, our Financial Managers failed to realize that the country is meeting all its funding requirements by selling its Nationalized institutions and through higher inflow of Remittances. Pakistan has never made big strides in Exports because of obsolete technology. Textile sector too did not invest in modernization of its industry. The country hence could only offer raw material.

They totally failed to maximize the God gifted opportunity to bring structural changes and modernize its agriculture and industrial sector.

Policy makers did not even pay heed to the rising oil prices that were surging sharply in the international market that has wiped out Pakistan’s gain.

The country failed to capitalize from the God gifted opportunity, as focus instead of shifting towards manufacturing and industrial sector and to bring structural changes tilted towards consumer side.

Pakistan Debt, Borrowing and Bickering

In Pakistan, norms differ. We try to “Make a Mountain out Of a Molehill”, but do not want to accept mistakes/blunders. With ongoing policy, every Finance Minister will be faced with similar situation and will continue to face music and economic condition will worsen, unless the nation is prepared to bite the bullet.

Right now rising debt may not be a crisis, but it a serious emerging problem in relation to size of income receivable and GDP. The honest fact is that our political system cannot handle rising debt burden that demands non-nonsense management.

Honestly speaking our Fiscal/Monetary Managers in last 30-years have never ever thought of the price that the nation/economy will have to pay for maintaining extraordinarily High Discount/ Policy Rate. If we take the compounding factor of last 15 years, higher policy rate may have roughly cost exchequer nearly Rs 4 Trillion, which is why Domestic Debt has hit Rs 15.389 Trillion plus RS 467 Billion Provincial borrowings banks versus Rs 1.8 Trillion (2002) and External Debt $ 76.5 Billion and combined debt servicing at current pace will surely hit Rs 2 Trillion vs total debt servicing of Rs 365 Billion in 2002.

Our problem is that policy makers never have realized that unnatural higher interest rate has no merit and makes servicing of loans costlier, which will make lives of our future generation miserable. With ongoing complacent approach and no change in stance I am targeting combines debt to surpass RS 35 Trillion by 2021-22.

My question to all the critics is that when we have 1.2 million tax payers or 0.57 of the total population and with major part of the economy undocumented and the country since last 30-years is surviving on domestic and external borrowings then who should be held responsible.

The economic condition suggests that Pakistan’s debt burdened economy is surviving on SBP “Printing of Money” and on Foreign Borrowing. A country that has estimated population of 207.8 million does not require 140 million Cell phone Subscribers. Neither there is much to boast about annual car sale of nearly 220.000 that imports over 50 pct of auto related raw material. Similarly motorbike sale is 2.2 million.

In 2016, Pakistan’s banking sector pocketed net interest income of Rs 428 billion mainly due to large portion of its funds were invested in government paper instead of major lending to corporate sector, which is the major cause of slump in industrial and manufacturing sector. These are few examples. We have to set our priorities.

Bottom line is that the nation is fed up of sermons, flowers economic notes and jargon. Don’t tell the readers that there is plenty of corruption, taxes are evaded, economy is undocumented, cost of doing business is very high, and there is no clarity in government policy etc. Just tell what needs to be done and how much and how quickly nation will be able to pay debt and how much nation can benefit in monetary terms to overcome BOP/CA Deficit problems.

There is only one solution to the problem, tax all income directly and restrict unnecessary imports by imposing 300 to 500 pct duty for next 5-years.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Donald Trump will soon nominate a head to lead world’s most powerful Central Bank, as Janet Yellen’s term will expire in February.

Last month, Vice Chairman Stanley Fischer in a surprise move announced his resignation that will create another opening next week.

Market will be keenly watching of past ongoing tradition of reappointment of the FED Chair or discontinuation of trend.

The Chair will have a massive task to re-balance FED’s USD 4.5 Trillion balance sheet. In Obama’s tenor FED pumped a little more than $ 4 Trillion in the economy through bond its buying strategy to stimulate ailing US economy.

Here are four names shortlisted by President Donald Trump for FED Chair.

-Janet Yellen, staunch in her Dovish approach is still a contender because of her experience, market liking and past practice of re-appointment. But again reminder of Trump’s November 2016 statement that he plans to put Republican in role instead could be a negative factor.
During his Presidential campaign Trump was very critical of Janet Yellen acusing her of artificially keeping interest rates low to boost economy.

-Kevin Warsh, stands good chance and I my tilt is towards him as the next FED Chairperson. He was associated with Bernanke and is expected to have good sense about monetary policy. He is known for targeting inflation, but he is not considered aggressive in his stance. Though not an economist, but odds may favor him.His father-in-law is Trump’s longtime friend and well knows personality of the make-up industry Mr. Lauder.

-Gary Cohn’s personal net worth is around $ 260-70 million. In past made some extremely Hawkish statements & is a Dollar Bull. He may struggle to get the nod from Senate because he is personally worth a lot in size that may hinder his appointment.

-Jerome Powell had a meeting with President Donald Trump. He is a Republican and keen supporter of Janet Yellen, he famous for his Dovish approach and could be a good choice for Vice Chairman.

The question that bothers me all the time is that can Pakistan Economy keep borrowing forever, which means Permanent Debt? For how long can Pakistan’s Economy survive through the process of money creation, as the economy is stuck in a low growth trap?
It is now more than a decade, to meet its funding shortfall/requirements, government regularly creates Asset by issuing debt instrument (i.e T/bills/Bonds) and receives cash against its distribution.
State Bank of Pakistan cannot keep on printing money forever or else eventually it will burst at a certain point. The economy is already trapped in a vicious cycle of debt due to lack of fiscal and monetary policy role in stabilizing the economic cycle. Therefore, there is desperate need of vision for the longer run.
State Bank of Pakistan cannot act beyond the limits of its given mandate. I would like to highlight three main components of SBP’s Asset. They are Foreign Exchange Reserves, Loans given to Banks and Government Securities (GoP). |
If we take a serious look at the SBP’s Balance Sheet all three is of extremely high relevance.
SBP’s Fx Reserves should be sufficient enough to meet the financial liabilities of economy, unfortunately since over a decade State Bank of Pakistan and the economy is solely dependent on borrowed money due to weak Fiscal and Monetary Policy.
Here is why Pakistan’s economy has been dipping and slowly sinking. Economic slowdown has ruined Pakistan’s financial system. Pakistan’s proportion of Banks Loan to Deposit Ratio (LDR) is too low by international standard, which is very alarming. Regrettably it has never been addressed by economist/analyst or the critics.
In comparison to the global trend, to give you the sense, in GCC area Loan to Deposit Ratio of Qatar is 110 pct, Oman is 104 pct, UAE is 100 pct, Saudi Arabia is 88 pct. In Euro area it is 107 pct, Singapore has hit 100 pct recently, in Thailand it is hovering around 96 pct. Malaysian LDR is around 89 pct, USA is LDR 80 pct, India has been averaging at 78 pct, though demonetization have distorted the number, which is now picking up.
But in Pakistan, it is currently at 52 pct. Loan ratio in 2007 was 75 pct that fell to 58 pct in 2012 and the decline continued till date.
And thirdly, SBP Data of Investments by Banks in GoP shows bank investment in GoP surging by nearly 6 times to Rs 7.188 Trillion which is more than twice of SBP Reserve Requirement.

CONCLUSION

I have a serious concern about what I have been observing since almost a decade and would like to make an honest and fair comment. 62 pct Investment in GoP by banks against 52 pct advances is meaningless and is the real cause of economic disaster.
Exceptionally large size Government Paper is a dominant asset and its only purpose is to meet the compliance requirements to fulfill donor’s demand at the expense of growth. It is also directly used to control Money Supply as this huge proportion helps to contain Spending and Deficit at the cost of Economic Growth. Several economic indicators available on the SBP webpage give fair hint that over the years and in difficult period SBP has successfully managed liquidity though with much discomfort (Local & Foreign Currency).
To identify the economic crippling factor, let’s take a deeper and serious look at the statistics available on SBP’s web site and the Fiscal Year Financial Estimates. Investment by banks in GoP is Rs 7.188 Trillion against Bank Deposit size of Rs 11.65 Trillion and Bank Loan size of Rs 6.03 Trillion. Debt (External & Domestic) is Rs 24 Trillion. Loan against Foreign Currency Assets USD 3.9 Billion (Forward & Swaps). The size of its regular liquidity injection through its open market operations (OMO) to manage cash flows that also helps its Domestic debt Profile is Rs 1.59 Trillion. External/Domestic Debt (Rs 23 Trillion), Debt Financing Annual (Rs 1.8 Trillion) Trade Deficit (Likely around $ 31 Billion), Inward Remittances (Rs $ 19 Billion Estimate), Currency in Circulation Rs 3.98 Trillion, Ratio of Commercial Bank’s Deposit/Advance 52 pct and Trend of Revenue Collection Target (Rs 4.013 Trillion is likely to miss by 5-8 pct). And can we forget nearly Rs 800 Billion Circular Debt.
If the above data is analyzed carefully, it will give clear sense of urgency in a nutshell, as information provided on the SBP website suggests that though SBP has effectively used its Monetary Tools, but its Policy Tools is getting exhausted. Data Analysis clearly indicates “Severe Liquidity Crunch”, which is caused by excessive borrowings (Domestic & External).
The economic imbalance is a severe problem, which is surely caused by lethargic tax collection policy and pathetic export performance that has been constantly underperforming for last 6-years.
Current growth pattern has been unproductive in terms of country’s desperate economic need that has to be economically beneficial. This is why at current growth pace, problems will multiply and SBP cannot even think of unwinding or reducing the size of its Balance Sheet. Hence, SBP will have to continue with its liquidity injection policy pushing both debt and its financing higher.
In my view, since last couple of years SBP’s higher interest rate policy is not in line with low inflation and is a mismatch as per global norms that have further dented the cash flow position creating financial imbalance.
If we make country wise comparison, in UK inflation is 2.9 pct, Interest Rate is 25 basis point and 10-year bond yield is 1.33 pct. In USA inflation is 1.9 pct, interest rate is 1.25 pct and 10-year bond yield is 2.22 pct. In Germany inflation is 1.8 pct and 10-year bond yield is 0.404 pct. In Spain inflation is 1.6 pct, 10-year bond yield is 1.604 pct. In Italy inflation is 1.2 pct and 10-year bond yield is 2.205 pct. In Japan inflation is minus 0.10, interest rate is 0.40, and 10-years bond yield is 0.031 pct, in India inflation is 3.6 pct, interest rate is 6 pct and 10-year bond yield 6.66 pct. In Pakistan average 2-month inflation is 3.165 pct, SBP Reverse Repo (Ceiling) Rate is 6.25 pct, 10-year bond yield is around 8.15 pct and coupon is offered 8.75 pct.
There is dire need for policy shift, Pakistan’s problem can never be resolved and any growth will be short lived unless banking sectors Advance/Deposit ratio realistically enters in a 65-70 pct range band.
I hope better sense will prevail and our monetary policy committee will realize the cost nation is paying, as high policy rate and bond coupon is the real culprit, which is hurting the nation or else in by (2023) country’s debt will be close to Rs 35 Trillion and annual interest payment Rs 2.8 to 3 Trillion.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Jamie Dimon is right about Bitcoin, reminding investors about 17th century Dutch Tulip Bulb crash that was brought from Turkey in 1593 by botanist Charles for research work. From 1630 onwards, Bulb prices rose steadily and its value reached nearly 10 times than the ordinary Dutch workers salary or few Bulbs were worth a value of a house. But in 1637, as supply flow increased and when sellers decided to offload its holdings, prices crashed within no time.
Bitcoin that was created on October 2008 was released in January 2009. Unlike Banknote or Coin, there is no physical existence of the Crypto-Currency that can neither be deposited in a home locker, drawer or kept under pillow. It is Digital Cash or Online/Virtual Currency that only exists on Computers.
The truth is that Crypto-Currency is only a “Dream or Abstract Currency” and Buyer’s emotions are attached with it. But in reality if try we go into the details presently there is no logical sense about this product.
If we look at some of the statistics, daily Fx Trading Volume is UD 5.3 Trillion and the total size of Derivatives, which is off balance product, it is 6-7 times more than the total size of global economy ($ 75 Trillion) of which nearly 80 pct is documented and 20 pct is shadow economy.

Both the above figures are documented and regulated and are officially reported and hence. This is why it can easily be monitored as per SOP and per operational policy manual that can be accessed by the regulators/financial institutions, tax authorities for internal control or for audit purpose. Hence, it becomes easier to evaluate the credit risk involved.

While in comparison, size wise Market Capitalization of Crypto-Currency is tiny USD 137 billion or approximately 0.0025 pct of the above data. Digital Currency is not protected, as it is not backed by financial regulators or the Central Banks, hence risk involved is huge and unimaginable.

It lacks support from major exchanges and is not backed by financial system. For e.g., data of Bitcoin, which is the most popular crypto-currency is totally dependent on block-chain, which is basically a digital based ledger. This is why there are extreme security risk/issues. It can also be easily hacked.

Therefore, any such type of financial investment instrument without Central Bank or Financial Regulators backing is worthless due to financial risks involved that always poses high risk of collapse.

History of Tulip Bulb suggests that in the absence of backup support from Central Banks and Financial Regulators, it took almost 10-years for active trading activity before collapse occurred.

Similarly, the rising trend of Bitcoin price from $ 0.8 per Bitcoin on July 2008 to current level of $ 3978 for one Bitcoin is based on similar pattern that was witnessed in 17th century Tulip collapse.

While, BIS, which is considered Central Bank’s Central Bank in one of its recent report has shown its grave concern calling Central Banks to take the matter seriously. Fearing volatility, it is recommending Central Bank’s to consider issuing its own Digital Currencies.

The cause of alarm bell raised by BIS is obvious because apart from Bitcoin, which is most the popular Digital Currency, during this decade well over one thousand of crypto-currencies have emerged.

Looking at the market size of crypto-currency, it is still tiny in size. One of the Cambridge University research suggest that across the world there are 3 million Crypto-Currency users.

The current pace of volatility and regular mushroom growth of crypto-currency in the absence of financial regulator, the ongoing trend is alarming, though many investors would think that Bitcoin is still by far the most promising virtual currency.

In most recent development to protect customer’s asset some of the major economies have shown serious concern about virtual currencies. Regulators are getting serious, as China, UK, Hong Kong and South Korea.

Last week, China took some serious steps and is likely to block the network connection. Some of the reports are suggesting recent bounce back of Bitcoin is caused by one month grace period given to prepare for closure of exchanges trading platform that should be closed by end of October.

Investors should rethink about their investments strategy in Crypto-currencies, as in recent times, oil is best example. News of small oil glut often causes sharp drop in prices, which means if any of the smart miner of crypto-currency decides to take advantage of and flood the market with Digital Currency, the collapse can occur.

Let better sense prevail. Cost to mine gold roughly ranges between $ 800-1.000 per ounce and after unwinding of quantitative easing, gold do not have the legs to surge on market demand, it only surges on extremely bad news and struggles in $ 1350-00 range before exhausting.

Therefore, Bitcoin at $ 3978 is unimaginable. Digital currency investors should seriously rethink about their strategy, as unwinding could be better bet and more sensible approach rather than waiting for accident to happen.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Last week New York State Department of Financial Service (DFS) banking regulators that were seeking USD 630 Million penalties for compliance failure reached an agreement with Habib Bank to settle illicit money transfer issue at USD 225 Million fine.

It seems that the reduction in HBL fine is the outcome of conditional agreement to close its US Operations, which if true is unfair on part of regulators.

Sole purpose of money laundering is to hide funds or assets from the state or the intention is to somehow legalize the funding received from unlawful source or illicit activity. In money laundering activity initially funding is obtained directly, though transaction wise it may vary from each other. But money laundering always involves proceeds of illegal activity.

Terrorist financing has another dimension, as the purpose is to utilize money for illegal political activity. In this case funding may not necessarily be obtained only by illegal means or illicit proceed. Funding sources can carry legitimate tag possibly via charitable donations or through foreign government’s sponsorship plan.

Money laundering and terrorist financing are financial crimes that have severe and adverse economic impact, as both eventually is misused for wrong purpose and is not part of documented economy that has many risks involved.

Unfortunately, due to the size of transactions Banks/Financial Institutions always gets involved directly or indirectly as third party in the financial crime as victim. There is rise in trade based money laundering through fake import and export invoices. Transfer of money through shell companies without any economic activity in another popular way to shift large size funds.

To fight financial crime, strong and standardized anti-money laundering strategy/program is required to reduce the risk of all types of misdeeds, as Bank transactions still play dominant role for laundering.

To comply with anti-money laundering rules that include expense on staff and systems, it is estimated that cost wise US institutions alone spends nearly USD 8 Billion annually. One of the reports suggests that reporting of suspicious activity in USA has jumped from 663.000 in 2013 to nearly One Million in 2016.

However, though risk remains high, US Federal Regulator Data suggest improving trend in terms of fines imposed. In 2016 office of the Comptroller of the Currency AML related 41 actions taken, which is lowest since 2011 according to available Association of Certified Anti-Money Laundering Specialist (ACAMS) data. 9-penalties were carried out against 23cases in 2015 versus 47 cases. To give you a sense of others, UK Financial Conduct Authority and Gambling Commission penalized 5 AML related enforcement action in 2016. And in April same year Canada’s Fintrac issued penalty for the first time against unknown large size bank.

In another key survey report, in USA, findings suggest banker’s ethical behavior has become questionable as their illegal or unethical behavior has doubled since 2012. The reports says that nearly 35 pct of those earning USD Half a Million plus annually are witness to all the wrong doings at their place of work and their institutions fully support and protect them. Interestingly the survey made specific mention of bonuses and remunerations blaming it for paving way for a force compromise on ethics and law.

In 2013, President of FED New York said there is evidence of problems involving some of the large financial institutions relating to law, regulation and public trust and further added that there is deep evidence of deep seated cultural and ethical failure.

Senator Berne Sanders famous for making anti bank statements is on record having said that the business model of Wall Street is fraud, which according to him. “Business Model” is a plan for making money. About financial institutions he says that 6 of them hold about 60 pct of assets, they holds over 40 of bank deposits and their engagement in mortgage business is 35 pct, issues 65 pct of all credit cards.

Most recent case of anti-money laundering and breach of law in violation of terror financing law engulfing Commonwealth Bank of Australia has further exposed cult of leadership, as its highly paid CEO ignored violation on more than 53,000 occasions. The bank failed to notify regulators of large cash transaction blaming coding error and wants regulator to believe that it was just a mishap. This is ridiculous.

It is a common claim that top executives are paid exorbitantly high salaries plus performance bonuses, as a reward for their extraordinary talent.

I am not sure about their hidden talent and if they deserve all that money, but after looking at the records in percentage terms, I can safely say that the engineers are more result oriented than the bankers, as planes do not crash very often like financial market crash, buildings and bridges do not fall regularly and roads are not always washed away, but sadly financial crash happens most frequently that linger on for decades and all the mending is done by applying financial engineering tools.

This is why to manage global financial crisis/irregularities complex financial instruments “Options was introduced in 1973 to overcome disaster that helped in blossoming global financial industry.

With the passage of time, cracks once gain started to appear in financial market, as the Global economy grew to unprecedented due to creation of new debt. But where did all the money disappear? All the good money was sucked by so called financial market gurus/experts and major chunk went into the shareholders pocket.

Then again in 1994, Credit Derivatives, Off-Balance Sheet Product, brainchild of then Chase Manhattan Bank now JP Morgan came to the rescue of world financial market. This notorious product is not part of asset and debt, hence it does not appear in financial institutions or corporations balance sheet.

Estimates suggest that the massive growth helped the size of Derivatives to reach close to USD One Quadrillion ($1.000 Trillion), which is now estimated to be half the size. Keep in mind the total size of Global economy is USD 74 Billion (Current).

Risk Management & Control Framework

Primary objective of Risk Management is to ensure Banks financial stability in medium to long term and to have operational flexibility so that it can make quick adjustments as and when required to meet its mandate.

Customer due diligence is the key to the beginning of any transaction that demands customer information including nature of business. Verification of information is necessary that is being provided by the customer when opening an account and Technology and Software plays vital role in identifying the genuineness of a customer.

Then comes matters of internal policies, procedure and banks reporting structure (internal and Central Bank), as bank are required to adopt a risk based approach, because weak AML controls have reputational repercussions.

By seeking such information from its customer, it helps to ensure that AML controls are placed according to the required standard that helps in minimizing or from preventing the financial system from being used for money laundering or for terror financing purpose.

This is why strong governance is demanded for better operational procedures, policies, limits and checks. It helps to manage risk and control policies, which is based on best international banking practice.

Conclusion

In mid-July 2012, US Senate released a 335 page investigation report on HSBC’s ties with Al Rajhi Bank with laundry list of offenses. Al Rajhi’s link to terrorism were conformed in 2002 by US agents.

In 2005, HSBC was linked to encashment of USD 130.000 worth of traveler’s cheques and its compliance team asked for discontinuation of all business, but by end of 2006 the relation was reinstated. And finally in December 2012 HSBC was charged and it announced that it had agreed to USD 1.92 Billion settlement with authorities. HSBC has learnt a good lesson and is now very choosy about its customer/business.

In March this year it was reported that some of the biggest global banks were engaged in processing millions of Dollars from Russian money laundering schemes.

Leaked report disclosed names of some of the Major Banks involved. They are Wells Frago, JP Morgan, Barclays and few others.

Bank of America, JP Morgan and Western Union were allegedly involved in drug trade in 2014.

In 2013, Royal Bank of Scotland was fined by mere USD 100 Million for concealing 3.500 transactions that involved transfer through New York Banks.

I would like to highlight that after George Osborne’s warning in his letter to Ben Bernanke and Timothy Geithner not to pursue criminal charges against HSBC as prosecuting could lead to global financial disaster helped the bank to escape charges.

In comparison to the nature or type of offence and penalties imposed on others based on the size of bank, regulators approach towards Habib Bank (HBL) is biased and sheer hypocrisy.

And if the argument is that others too have been penalized, then HBL never cheated nor the Pakistani bank was involved in any wrong doings, it was certainly not intentional. The bank may have misjudged or misread the seriousness

A fine of USD 225 million based on size of the bank is injustice. Fine imposed on HSBC is bank’s 3-4 weeks profit. Fine imposed on RBS are equivalent 2-times of banks current annual Bonus. In 2010 bank’s bonus pool was 8-time of the penalty imposed on Habib Bank. Whereas for Habib Bank a fine of USD 225 million is 70 pct of banks consolidated profit in 2016. I protest ! This is unfair ! What a shame !

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).